An activist holds a newspaper with a headline that reads in Spanish "Argentina or vultures" over the government's $1.5 billion dispute with a U.S. hedge fund. Pic: Victor R. Caivano.Source: AP

HOW DID WE GET HERE?

The default comes 13 years after the country defaulted on $101 billion worth of debt in 2001, when a group of investors led by American billionaire and hedge fund owner Paul Singer swooped in to buy the debt at cheap prices.

In the years since, 92 per cent of other creditors have accepted restructures that have seen 70 per cent of the value wiped from the debt. However one small group has refused and sued Argentina in US court, where Judge Thomas Griesa ruled regular interest payments can’t be distributed unless the hedge funds are also paid.

The ruling means Argentina is stuck between a rock and a hard place; banned from making regular repayments without paying the hedge fund investors. However if they agree to pay the hedge fund investors, this could lead to a wave of claims for equal treatment from the investors who accepted the write downs under what is called a Rights Upon Future Offers, or RUFO clause.

A default is likely to deepen the recession already affecting Argentina and isolate it from the global economy. The country has already experienced inflation rates of 15 per cent in the first half of the year and a default could devalue the peso even further. It’s already sunk 20 per cent since January 2014. However some expect it could be short-lived until a deal is reached.

Despite the economic disaster it could create, Argentinians support the government’s refusal to negotiate with the holdouts. The government has repeatedly labelled the creditors “vultures” who are picking over the carcass of the previous default. A recent poll showed 50 per cent of people approve of the way President Kirchner is dealing with it, while just 25 per cent view if negatively.

People gather during a small demonstration in support of the government in their dispute over $1.5 billion with a U.S. hedge fund in Buenos Aires, Argentina. Pic: Victor R. Caivano.Source: AP

WHO ARE THE HOLDOUTS?

The holdouts are a small group of wealthy investors from NML Capital, Aurelius Capital Management and Blue Angels, according to Forbes.

Leading the charge is Paul Singer, the 69 year old billionaire and owner of Elliott Management Corporation, which owns NML Capital. After buying the bonds cheap in 2001 he has decided to hold out for the full repayment amount rather than accept subsequent restructures — something US judges have supported his right to do.

Over the years he has tried to get his money back by seizing Argentina’s military ships and funding lobby groups, the New York Post reports. Now, Argentine citizens are set to suffer as a result of the failed negotiations.

People walk by the Bank of the Nation headquarters in front of Plaza de Mayo square in Buenos Aires Pic: Daniel Garcia.Source: AFP

WHAT HAPPENS NOW?

Court-appointed mediator Daniel Pollack said the failure of the talks trigger will hurt the country’s economy as well as bondholders who were not part of the dispute

“The full consequences of default are not predictable but they are certainly not positive,” Mr Pollack said.

Mr Kicillof blamed the Judge that has prevented a situation where the country can make payments while continuing to negotiate with the holdout funds.

“That money is there. Obviously, if there were a default, the money would not be there,” he said.

“Argentina paid. It has money. It is going to continue to pay. The one who is responsible for this situation is Judge Griesa.”

“We are going to pay those who hold bonds that have been defaulted on, but on reasonable terms, not on terms that amount to extortion, created under pressure, under a threat,” he said.

What do you want to know about the situation in Argentina? Email victoria.craw@news.com.au

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